We are experiencing very challenging insurance market conditions in 2020, and could devote a number of articles to what is happening in the marketplace and why. But let’s assume we understand the “whys” of what is driving the market and focus on what options you can offer to your clients to achieve their desired premium objectives.
Over my thirty-plus year career in the commercial property and casualty insurance business, I have experienced a number of difficult market cycles and have developed and delivered numerous options and alternatives to my clients to produce the desired premium to coverage solutions. In this unprecedented year of 2020, the insurance consumers we service are going to demand options.
I like to classify the types of insurance value engineering options into five separate categories:
1. Carrier Changes
Now more than ever, the decision of changing a carrier partner is a delicate one. The number of viable carriers has diminished and even more so in the group that can and will offer significant amounts of catastrophe coverage.
If your incumbent carrier has had a difficult year operationally within their book on a certain class of business, or if the insured has submitted a significant claim, the renewal will likely be even more challenging. The incumbent carrier will certainly be in an adverse position with pricing the renewal and new carriers may be willing to write the account for less than the incumbent is offering.
Determining if it is prudent to move and change carriers post-loss is not an easy one, but it needs to be explored. Inserting competitive pressure is one of the best tools we have to make sure our clients are paying reasonable market prices.
2. Coverage Changes
During easier insurance markets, many carriers often agreed to add coverage enhancements in lieu of premium reductions. This tactic often helped retain insureds without the continual need to reduce pricing each year when carriers were in hyper-competitive modes.
In the current market cycle, however, it may be time to start to examine coverages that your client does not need in their policy in their current economic situation. This helps in two key areas: 1) reducing exposure or concern to the incumbent carrier and 2) increasing competition from other carriers if you eliminate a coverage that precluded certain carriers from being able to write the risk.
Eliminating Flood Zone A coverage, Earthquake and Tier 1 Windstorm would be drastic examples of this concept. It could also be more cost-effective to carve out a specific coverage and or location and insure that peril or location on a stand-alone basis versus including it as a coverage on the master policy.
3. Increased Deductibles
Increasing the deductible amount is a very traditional premium reduction technique. Reducing the chances of a carrier paying the attritional losses that are affecting the insurance market can definitely reduce the premium increases being sought by the carriers.
However, when you are dealing with a particular risk with a low frequency of losses it is often difficult to negotiate commensurate savings to quantify the risk assumption for each and every claim. Carriers must still price for the large losses, and if there is not small claim activity on the account they will not be able to justify a large credit. Request the options and then run the projected cost impact by looking at historical “as if” loss data.
4. Policy Limit Reductions
This is another common technique that is utilized in difficult markets by insureds. As the cost of insurance increases for the primary limits of coverage, the excess layers or limits are reduced.
The decisions are made for a number of reasons. Usually it is purely financial; there may not be enough money left in the budget to buy excess coverage and the luxury of having full TIV limits is something that may need to be sacrificed.
The decision making process for choosing limits can be assisted by reviewing catastrophe models and risk concentration reports. If there is very little probability that the insured will penetrate a high excess layer, they should be shown the potential savings for eliminating the layer.
5. Client Self-Insurance and/or Quota Share Participations
When renewals get very bad, we hear clients say “we just won’t buy the coverage” because it does not make financial sense to pay the premium to transfer that risk. Sometimes that may be the only alternative, but as a professional broker there may be ways to find an alternative to complete self-insurance.
That could be structuring a program where the insured is self-insuring an entire primary layer of coverage for one occurrence and then securing subsequent event coverage. The insured would then have a known financial exposure of only one occurrence limit.
Another tactic that many of my clients have preferred in tough markets is to assume quota share participations in one or more coverage layers. An example would be the client assumes 10% of primary 25M layer (2.5M of risk) and then 5% of a 50M xs 50M (5M of risk), the client knows exactly what they are saving (10% of the primary layer premium and 5% of the 50 xs 50 layer premium) and what they are risking as they participate with their carrier partners on their account.
When using any of the value engineering techniques mentioned above, we strongly suggest a detailed discussion with the insured to clearly outline the potential risk assumption related to the change. Illustrations of potential claim examples as a result of the change and a client sign-off is prudent risk management for any professional insurance broker. Helping your clients understand the financial impacts of coverage changes is an integral part of the process if you want to do it right and keep them for the long haul.